Stocks can't make it three in a row

Averages close lower after rally attempt

By

JulieRannazzisi

NEW YORK (CBS.MW) -- Despite a valiant effort to score a hat trick, the stock averages closed with modest losses Tuesday as a bruising sell-off in shares of Nortel Networks cast a pall on the technology group.

"Volume is very light and [indicative] of a market that's looking for more information, more guidance. There's a lack of conviction among investors over what to do next," claimed Peter Boockvar, equity strategist at Miller, Tabak & Co.

While the latest economic numbers have signaled a bottoming in the economy, Boockvar said investors must see continued signs of a gradual pick-up in activity.

Within technology, networkers were knocked by Nortel's slide on the back of the company's CFO resignation. Hardware issues also took their lumps.

But the biotech sector was brimming with buyers, with succulent gains countering the group's shabby performance since the start of the year. Airline, drug, utility and gold issues also sprinted while buyers continued to snub brokerage stocks despite an analyst upgrade of Merrill Lynch. Oil service, natural gas and paper stocks also finished in the minus column. Check market stats and latest sector performance.

Sprinkling anxiety into the marketplace earlier in the day was a fresh terrorist warning issued late Monday by the FBI. The agency revealed that a Yemeni could be putting together an attack as early as Tuesday. Read the story.

The Dow Jones Industrial Average
DJIA, -0.05%
fumbled 21.04 points, or 0.2 percent, to 9,863.74 after losing as much as 73 points at its intraday nadir. The index's weakest links included Walt Disney, American Express, AT&T, Intel, Microsoft, and Citigroup. Among stocks trading on the upside were Procter & Gamble, SBC Communications, Merck, Caterpillar and Honeywell.

Analysts sought to dispel investors' nagging accounting fears in various research notes. Companies' accounting tactics have been under the microscope following the Enron fallout and subsequent investigation.

"Concern over corporate financial statements has reached a fever pitch in recent weeks, [with] anxiety over accounting issues and bankruptcy risks almost completely overshadowing an improving economic picture. It seems highly unlikely that the current hunt for accounting indiscretions will find a widespread pattern of deceit in financial statements. The presence of a few bad apples does not signal that the barrel is spoiled," commented Stuart Schweitzer, global investment strategist at J.P. Morgan Asset Management in a research note.

"It should come as no surprise that some of the excesses of the 1990s economic expansion and stock market bubble are still coming to the fore. The volatility is not likely to wane anytime soon. Additional accounting disclosures are possible in the months ahead as companies file their 10-Q and 10-K reports. The U.S. is going through a cleansing process today and will likely be stronger as a result in the years ahead," the J.P. Morgan strategist concluded.

Steve Young, managing director at Banc of America Capital Management, said a look back at the 1990s reveals that earnings quality historically suffers during periods of economic and financial stress.

"During the last recession in 1991, corporate write-offs accounted for 39.5 percent of reported earnings, according to S&P. That figure grew from 16 percent in 1990, when the recession began. In 1992 and 1993 this propensity continued, with write-offs at 29 percent and 30 percent of reported earnings, respectively. Consistent with past experience, current write-off percentages have increased alongside the economic recession," Young observed.

Volume totaled 1.10 billion on the NYSE and 1.62 billion on the Nasdaq Stock Market. Market breadth was marginally negative, with losers elbowing past winners by 16 to 15 on the NYSE and by 18 to 17 on the Nasdaq.

Techs take a break

Weighing on the stock was Nortel's announcement late Monday that its chief financial officer, Terry Hungle, resigned amid questions concerning the company's 401(k) plan. Commenting on the news, RBC Capital Markets said it would be hard to imagine a more difficult timing for the announcement. While the incident appears to be isolated, the firm said it would expect the CFO ordeal to represent a significant negative shock to Nortel's share price over the near term. Morgan Stanley labeled any negative investor reaction to the news as "unwarranted." Read the Nortel story.

The company
NT
also told investors early Tuesday that revenue for the first quarter is expected to come in 10 percent below fourth-quarter levels and that it expects to return to profitability in the fourth quarter of 2002. The outlook was in line with Wall Street's expectations. The fiber-optic equipment behemoth said gradual revenue growth should commence in the second quarter.

Turning to analyst actions, Thomas Weisel Partners upgraded the electronics manufacturing services sector to an "overweight" from a "market weight" and also upped its rating on two stocks in the group: Jabil Circuit
JBL, -1.63%
was lifted to a "strong buy" from a "buy" and Sanmina
SANM, +1.53%
to a "buy" from an "attractive." Weisel said there's increasing evidence of stability in demand and production levels, adding that recent share price declines provide investors with an attractive entry point. Jabil rose 3.2 percent while Sanmina erased 2.3 percent.

EMC
EMC, -1.11%
declined a heady 6.9 percent. A former EMC executive claimed in a court deposition that the storage behemoth improperly recognized revenue and violated business contracts, according to a report in the Boston Globe. The Securities and Exchange Commission has interviewed the former employee. See full story. Among the other storage stocks, Network Appliance lost 5 percent and Brocade 1.6 percent while QLogic added 1 percent.

Broader market moves

Brokerage stocks declined across the board, though investors still had some sunny analyst remarks to bask in. Merrill Lynch, in fact, was upped to a "market perform" from an "underperform" by Sanford Bernstein based on valuation and belief that the securities industry is through the worst of its downcycle and now entering a recovery stage. Still, Merrill shares closed down 0.7 percent.

Sanford applauded the broker powerhouse's
MER, +1.00%
restructuring initiatives and reaffirmed its thesis that in the initial capital markets recovery, firms with strong market share in the highest-margin investment banking business will outperform.

In the insurance segment, MetLife
MET, +1.22%
gained 2.7 percent after posting better-than-expected fourth-quarter earnings. The company also said it's "confident" it'll deliver on its three-year plan to produce 15 percent growth in operating earnings per share annually through 2004.

Biotech stocks closed out the day with smashing gains amid weakness in the broader market. Merrill Lynch's Biotech Holdrs
BBH, -1.00%
put on 2.6 percent after losing 8 percent since the start of the year. The best performers included Affymetrix, up 8.2 percent, Genzyme, up 5.5 percent, and Human Genome Sciences, which rose 5.9 percent. Merrill Lynch said the recent poor performance of the sector masks how "high quality" the fundamentals have become for the industry. Merrill favors Genzyme
GENZ
MedImmune
MEDI, -0.79%
and Amgen
AMGN, -0.37%
Amgen added 2.4 percent while MedImmune erased 0.4 percent.

Among other biotech gainers, ImClone Systems
IMCL, +6.11%
tacked on 4.9 percent. The company, which has been under the gun over experimental cancer drug Erbitux, said Tuesday it had rejected a proposal from Bristol-Myers Squibb
BMY, -0.41%
to restructure a partnership agreement between the two companies. See full story. Bristol edged up 0.5 percent.

Blockbuster
BBI, -2.74%
piled on almost 9 percent after posting a fourth-quarter profit from operations that cruised past Wall Street's expectations. For 2002, Blockbuster expects to see double-digit gains in cash flow due to increasing DVD rentals. Blockbuster is a unit of Viacom, which owns a significant stake in MarketWatch.com, the publisher of this report.

Airline stocks took off without UAL Corp.
UAL, +0.40%
which was left behind with a 2.4 percent loss while the group as a whole ($XAL) ascended 2.3 percent. Investors stayed defensive with the carrier's 13,000 mechanics seemingly on the verge of voting to strike. Merrill Lynch said a strike by the mechanics would likely benefit AMR and Northwest the most. AMR jumped 2.1 percent and Northwest 2.4 percent.

Dow stock General Electric
GE, -0.72%
erased 0.8 percent. GE Specialty Materials, a unit of GE, announced that it would purchase the treatment services business of BetzDearborn from Hercules Incorporated
HPC, +8.77%
for $1.8 billion. Hercules rose 5.9 percent.

Bonds end with more losses

Government bonds finished on the downside for a second session.

There have been no economic releases to provide investors with direction over the past couple of trading days. The week's kingpin -- the January retail sales report -- is set to hit the tape on Wednesday. Retail sales are seen increasing 0.1 percent overall and 0.4 percent excluding autos, according to economists polled by CBS.MarketWatch.com. Check economic calendar and forecasts.

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